Arun Jaitley isn’t happy with P Chidambaram, and he’s letting everyone know.
The current finance minister’s feelings towards his predecessor were quite evident in Jaitley’s budget speech. His ire was provoked by the ambitious target Chidambaram had set for the fiscal deficit in his interim budget, in March. “My predecessor has set up a very difficult task of reducing fiscal deficit to 4.1% of the GDP in the current year,” said Jaitley during the speech.
“Considering that we had two years of low GDP growth,” he added, “an almost static industrial growth, a moderate increase in indirect taxes, a large subsidy burden and not so encouraging tax buoyancy, the target of 4.1% fiscal deficit is indeed daunting.”
Yet, Jaitley has decided to stick to the fiscal deficit target that Chidambaram set. At the same time, the finance minister has increased overall expenditure by 3.5%, compared to Chidambaram’s document in March, and given away around Rs 22,000 crore in tax sops. The 4.1% figure already seemed much too ambitious. How is Jaitley going to make up the shortfall?
Taxes, primarily. Not increasing them but collecting more. The fiscal deficit figure depends to a large extent on government revenues meeting very optimistic growth numbers. Jaitley pegged net tax revenues for the Centre to grow by 16.8%. Last year, taxes grew by 12%.
This number is optimistic for a number of reasons. The government hasn’t come close to reaching its tax collection target for the last three years, with the difference running into tens of thousands of crores. The year 2010-11 is the outlier here, with the government far outperforming its own budgeted estimates. Jaitley might be hoping to repeat that performance. Yet, the monsoon is faltering and there are worries that this could be a drought year, which would dent any hopes of higher collections.
Another indicator is the Gross Domestic Product. As the GDP rises, one can expect better tax collections from individuals and corporations, but here too Jaitley’s growth expectation of nearly 17% seems optimistic. The finance minister has budgeted in 13.4% growth in nominal GDP. India was still growing faster than 8% a year in 2010-11, when the economy was boosted by the rollback of measures that had been put in place in the aftermath of the 2008 global economic crisis.
National Democratic Alliance leaders have also often spoken out against “tax terrorism,” ostensibly a reference to a retrospective taxation clause introduced by Pranab Mukherjee when he was the finance minister, but also indication of a general approach towards taxation that doesn’t seem to be adversarial towards businesses. Despite this, Jaitley’s budget documents talk about increasing the tax-to-GDP ratio and maintain that the government has the right to retrospectively tax companies.
The government can hope to make headway in tax litigation. Jaitley pointed out that up to Rs 4 lakh crore is caught up in various courts and appeals bodies, and announced a number of administrative and legal reforms that aim to address this problem.
Jaitley is also counting on earning a fair amount of money from non-tax revenues, with optimistic expectations about payouts from Public Sector Units and disinvestment, although the budget doesn’t specify where the stake sales are likely to happen. In fact, the budget expects more than Rs 63,000 crore in revenues from disinvestment, compared to just Rs 25,000 crore last year.
All put together, it means Jaitley is either truly hoping to have a bumper year in revenue collections or was forced into being incredibly optimistic on the taxation front to ensure his government would be able to stick to the fiscal deficit target that had been set by Chidambaram. He wouldn’t be the first finance minister to rely on some creative accounting: in his interim budget in March, Chidambaram’s tax collection estimates were Rs 9,000 crore more than that used by Jaitley.
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The current finance minister’s feelings towards his predecessor were quite evident in Jaitley’s budget speech. His ire was provoked by the ambitious target Chidambaram had set for the fiscal deficit in his interim budget, in March. “My predecessor has set up a very difficult task of reducing fiscal deficit to 4.1% of the GDP in the current year,” said Jaitley during the speech.
“Considering that we had two years of low GDP growth,” he added, “an almost static industrial growth, a moderate increase in indirect taxes, a large subsidy burden and not so encouraging tax buoyancy, the target of 4.1% fiscal deficit is indeed daunting.”
Yet, Jaitley has decided to stick to the fiscal deficit target that Chidambaram set. At the same time, the finance minister has increased overall expenditure by 3.5%, compared to Chidambaram’s document in March, and given away around Rs 22,000 crore in tax sops. The 4.1% figure already seemed much too ambitious. How is Jaitley going to make up the shortfall?
Taxes, primarily. Not increasing them but collecting more. The fiscal deficit figure depends to a large extent on government revenues meeting very optimistic growth numbers. Jaitley pegged net tax revenues for the Centre to grow by 16.8%. Last year, taxes grew by 12%.
This number is optimistic for a number of reasons. The government hasn’t come close to reaching its tax collection target for the last three years, with the difference running into tens of thousands of crores. The year 2010-11 is the outlier here, with the government far outperforming its own budgeted estimates. Jaitley might be hoping to repeat that performance. Yet, the monsoon is faltering and there are worries that this could be a drought year, which would dent any hopes of higher collections.
Another indicator is the Gross Domestic Product. As the GDP rises, one can expect better tax collections from individuals and corporations, but here too Jaitley’s growth expectation of nearly 17% seems optimistic. The finance minister has budgeted in 13.4% growth in nominal GDP. India was still growing faster than 8% a year in 2010-11, when the economy was boosted by the rollback of measures that had been put in place in the aftermath of the 2008 global economic crisis.
National Democratic Alliance leaders have also often spoken out against “tax terrorism,” ostensibly a reference to a retrospective taxation clause introduced by Pranab Mukherjee when he was the finance minister, but also indication of a general approach towards taxation that doesn’t seem to be adversarial towards businesses. Despite this, Jaitley’s budget documents talk about increasing the tax-to-GDP ratio and maintain that the government has the right to retrospectively tax companies.
The government can hope to make headway in tax litigation. Jaitley pointed out that up to Rs 4 lakh crore is caught up in various courts and appeals bodies, and announced a number of administrative and legal reforms that aim to address this problem.
Jaitley is also counting on earning a fair amount of money from non-tax revenues, with optimistic expectations about payouts from Public Sector Units and disinvestment, although the budget doesn’t specify where the stake sales are likely to happen. In fact, the budget expects more than Rs 63,000 crore in revenues from disinvestment, compared to just Rs 25,000 crore last year.
All put together, it means Jaitley is either truly hoping to have a bumper year in revenue collections or was forced into being incredibly optimistic on the taxation front to ensure his government would be able to stick to the fiscal deficit target that had been set by Chidambaram. He wouldn’t be the first finance minister to rely on some creative accounting: in his interim budget in March, Chidambaram’s tax collection estimates were Rs 9,000 crore more than that used by Jaitley.
